WHITE HOUSE ISSUES SEQUESTRATION REPORT

On September 14, 2012, the Office of Management and Budget released the Administration’s long awaited report on the implementation of the potential sequester currently scheduled to occur on January 2, 2012.

The report satisfies three of the four major requirements of the Sequestration Transparency Act of 2012 (“STA”). First, it provides an estimate of the percentages and dollar amounts of the reductions that will need to be applied to each non-exempt budget account in order to meet the sequestration targets imposed under the Budget Control Act of 2011 (discussed in greater detail below). Second, it identifies all exempt discretionary direct spending accounts. And third, it provides additional explanations that are ostensibly intended to “enhance public understanding of the sequester.”

The report, however, does not provide the key data point necessary for contractors to fully plan for the impacts that sequestration may have on their particular programs – that is, it does not identify the reductions required for each nonexempt account at the program, project, or activity (“PPA”) level. As discussed in a previous post, knowing how sequestration will be applied at the PPA level is necessary to determine the level at which the cuts will occur and, in turn, to predict how particular contracting opportunities would be affected by sequestration. An explanation of how sequestration would be applied at the PPA level was also one of the specific requirements of the STA. Nonetheless, the report does not include this information, explaining that

because of the STA’s reporting deadline of just 30 days, the large number of PPAs across all agencies and budget accounts, and inconsistencies in the way PPAs are defined, additional time is necessary to identify, view, and resolve issues associated with providing information at this level . . . Regularizing reporting across different budget accounts and agencies requires resolution of many definitional questions, and the sheer volume of this data presents administrative challenges that require additional time for OMB to address.

The report gives no indication of whether and when this additional PPA-level information will be provided.

In the meantime, there are still some valuable conclusions that can still be drawn from the report – particularly from the report’s discussion of the percentages and dollar amounts of the reductions that will need to be applied to each non-exempt budget account. Because some budget accounts have very specific purposes and provide the principal funding stream for particular areas of procurement, we can now attach specific dollar-figure cuts to specific areas and industries. For instance, the report estimates a $314,000,000 cut to the military’s budget for the procurement of Mine Resistant Ambush Protected Vehicles, a $276,000,000 cut to the Army’s budget for the procurement of weapons and tracked combat vehicles, and a $2,010,000,000 cut to the Air Force’s budget for the procurement of aircraft.* The key unanswered question is how these cuts will be applied at the PPA level, and in turn, which aircraft programs will be cut, which vehicle programs will be cut, and so on.

The report was also notable for its clear disagreement with these cuts. As repeatedly echoed throughout the report, the “Administration strongly believes that sequestration is bad policy” and “would be deeply destructive to national security, domestic investments, and core government functions.” But unless and until Congress passes legislation to eliminate these cuts, the Administration will have “no choice but to implement them.”

*One caveat to these figures is that, per the STA, they assume that government functions at the time of the sequester will be funded under a continuing resolution (CR) at the same rate of operations as in Fiscal Year (“FY”) 2012. But the continuing resolution that passed the House on September 13, 2012, would actually increase the rate of operations for most agencies by a small (0.612%) amount, and would allow the Department of Defense to spend for Overseas Contingency Operations / Global War on Terrorism expenses at the level set forth in the President’s 2013 budget request, rather than at the level in the 2012 appropriations acts. For this reason, the dollar-figure reductions estimated in the report would need to be adjusted to account for the spending levels likely under the FY13 CR.

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